Inheritance

My wife and I are to inherit a fairly substantial amount of money (north of $1,000,000). I am almost 60 and have 3 children aged 25-30. I have got some financial advise who suggest I put it into superannuation managed funds (not SMSF). While I understand the taxation benefits of this approach I am not particularly excited by it.

This is my plan, buy 4-5 houses for circa $300,000 each with 50% leverage. The rental return will more than pay the interest and perhaps put some back into principal. I would like to be looking for reasonable house on a large block in cheaper suburbs.

Hopefully this will get me 4% rental returns and a similar CG return to fund our retirement. With potential to develop or at least subdivide in 10 or so years once we have both stopped working.

Does anyone have any suggestions for how we should structure this? Is this a sensible approach or should I be putting it into super? Can I set up a SMSF and do it through there?
 
super is a vehichle, it can invest in shares, managed funds, residential and commercial property. There are some tax advanatages, and some disadvantages with super.

Your plan to purchase residential property could be done through super. Its not either or.
 
How would you be able to transfer $1 mill into your smsf if the csp means you're limited to $25k each individual in total per annum? Or does the cap only relate to employer/salary sacrifice contributions?
 
NON-CONCESSIONAL CONTRIBUTIONS


A separate limit applies to non - concessional contributions. These are contributions that
you make personally (either from your own savings or deducted from your after-tax salary by your employer ie not salary sacrifice contributions).
The limit per person is $150,000 for the financial year.


If you have not attained age 65, you can contribute up to $450,000 in one financial year
but you cannot then contribute any more in non-concessional contributions in the next two
financial years.
Example:
If you make a non-concessional contribution of $200,000 on 1 September 2013, you can contribute up to a further $250,000 before 30 June 2016.
If you contribute more than $450,000 in total over those 3 years, the excess

will be taxed at 46.5%.
If you have attained age 65, a limit of $150,000 applies each financial year. You cannot
bring forward the next two years of contribution limits.

Important Note:


If you are over age 65, you cannot contribute personally in a financial year until you have
worked for 40 hours in 30 consecutive days of that year.
If you have not attained age 65, you can contribute personally whether or not you are in the paid workforce

http://www.combinedsuper.com.au/pdfs/cf_Maximum_Super_Contributions.pdf
 
Thanks - I was under the impression that this concession had been removed. it may still take a couple of years to put in $1m if there's only one or two members of the find.
 
If you want your strategy to assist your children - e..g maybe properties for them in the future then you would need to be buying outside SMSF.

Also if subdivide is plan then would be problems if purchased within SMSF.

So exit strategy for SMSF needs to be considered.

http://www.thesmsfreview.com.au/blog/subdivide-land-purchased-smsf-loan/

If it was me I would do a bit of both - so some money into super for shares/managed funds and some into property outside super (if develop is plan)

Just be careful of the fees/commissions with putting it into super.
 
Residential property can be good when you're in accumulation phase as you aim to accelerate CG through tax benefits and leveraging.

However in retirement these two elements become irrelevant. Most retirees don't pay any tax so your tax benefits will go out too. As for leveraging, it will result in very little, nil or negative CF whereas at this stage of your life you should aim for a good, steady income year in year out.

You're pinning your hopes on CG but CG is not guaranteed every year and when it happens, to turn it into cash is overly cumbersome and costly.

So I don't think leveraged property, bar exceptional ones, is a good idea in retirement. Fully paid off - yes, but not leveraged, unless you have other income to live on and your IPs are just there to provide you with future equity.

With the hindsight of a decade in retirement I'll tell you what I'd do. This is not advice for you by the way, just what I'd do if I was lucky enough to inherit such a large sum of money right before my retirement.

- For the sake of diversification, split approx. 50-50 property and shares.
- Put the maximum into a SMSF (2 x 450K non-concessional) to eliminate tax
- Buy 2 IPs at 4% net yield = 20K income per year
- With balance, buy shares such as LICs with 6-9% grossed-up dividend = 30-45K per year.

Not a particularly high income I agree, but a higher yield than average, relatively safe and most importantly minimum hassle.
 
Id put the 900k (2 lots of 450k ) into an smsf and buy a commercial property either outright or on a low lvr. Why muck around with rubbish 4% yields and the effort of managing/maintaining multiple resi properties when there is a simpler option providing higher yields?
 
New York good article and comments thanks.

Sanj, good question. I guess i kind of have an idea on residential, never had anything to do with commercial property before. Also easier to sell 1 residential to free up some cash if required.

Truong, thanks for your view. I guess we're looking at leverage for our childrens benefit, it also spreads it a bit further to diversify risk (different suburbs etc). We don't plan on retiring for another 8-10 years and are both living relatively comfortably on our current incomes.
 
I take it you're a novice investor if you're asking this question.

My advice is take particular care if seeking the advice of an 'advisor'. Where kickbacks and commissions are involved, the service is free, and/or the deal is too good to be true, run.

Avoid anyone wanting to sell you OTP, serviced apartments and interstate properties.

Put the cash in the bank for now, read, ask, and keep educating yourself and play it safe until you know exactly what you're doing.

Some good advice by others here.
 
Id put the 900k (2 lots of 450k ) into an smsf and buy a commercial property either outright or on a low lvr. Why muck around with rubbish 4% yields and the effort of managing/maintaining multiple resi properties when there is a simpler option providing higher yields?

Surely higher yield but too much risk with a single asset.
 
Surely higher yield but too much risk with a single asset.

And higher yield = higher vacancy rate. Not to mention when you change tenants not only it would take longer than resi to find a replacement, but in most cases you would also have to give up a few months rent as the initial rent free period. Not the most stable for retirement IMO.
 
That is a large sum of money so the first thing I would suggest is some legal advice on asset protection, before and after death, and some around the area of a post death testamentary trust - there may be some benefits in transferring it to a trust now (extra benefits over and above a normal discretionary trust), but this will depend on a lot of things.

You then need some financial advice on how to invest and in what structure. Contributing it to super may be a good idea because of your age. No tax on income and CGs in super in certain situations. You may also want to lend money to your SMSF to invest, worth considering anyway.

It may or may not be a good idea to leverage into property inside super.

Get the legal advice before you take the money.

Also if you want to benefit you kids, consider asset protection, now and after your death. Loans may be a good idea.
 
I'm a bit confused here.
My understanding is that Inheritance (money) is not taxable... but if you contribute to Super then it is taxed at 45%! Why would you do that if that is the case? Surely I'm missing something here.


These are the things I may do if I have 3 kids 25-30 and got 1 mil.
- Do a villa (4) development. Kids could be part of owners or simply cheap renters.
OR
- Upgrade my PPOR, buy a nice car and then give deposit to children as gift. In return ask them to take care of my bills & expenses.
 
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